HP: A failure of vision?

Introduction

On 18 August 2011, as part of its announcement of third quarter 2011 results, HP announced that it would discontinue webOS devices.  The full announcement can be found at .  It also announced that it would explore strategic alternatives for its Personal Systems Group (which is responsible for business and consumer PCs and accessories, handheld computing, and a range of other hardware such as DVD burners and HP televisions).  HP stated that this would:

·         “Move HP into higher value, higher margin growth categories

·         Sharpen HP's focus on its strategic priorities of cloud, solutions and software with an emphasis on enterprise, commercial and government markets

·         Increase investment in innovation to drive differentiation”

HP’s announcement also declared an intention to purchase 100% of Autonomy Corporation plc.

 From Wikipedia Commons

What does this mean?

There are three (at least) parts to this story, which need to be picked apart.

Discontinuation of webOS devices

On April 28 2010, HP announced that it would purchase Palm Inc. for a total of roughly $1.2 billion.  In acquiring Palm, HP gained webOS, and stated that “Palm’s innovative operating system provides an ideal platform to expand HP’s mobility strategy and create a unique HP experience spanning multiple mobile connected devices”.  HP has not yet identified whether it would consider licensing of webOS to other manufacturers.

Strategic alternatives for its Personal Systems Group (PSG)

HP provided further detail on this in a separate 18 August 2011 announcement.  The group basically wasn’t giving HP a competitive return.  The options for this group would include “the separation of its PC business into a separate company through a spin-off or other transaction”.

Purchasing Autonomy Corporation plc

This purchase follows HP’s strategy as identified in its press release, “built on cloud, solutions and software”.  Autonomy introduces itself as a software company focussed on enterprise infrastructure software and information management.

HP's website, 21 August 2011

What is the impact?

There are short-term and long-term impacts from HP’s announcement.  In the short term:

·         Prices of hardware associated with webOS have crashed.  HP sells two models of tablet, its 16gb and 32gb TouchPad.  These were launched on July 1 in the US, with RRPs of $599 and $699 respectively.  Shortly after release the prices were dropped to $499 and $599.  At the time this is being written (21 August 2011) prices on HP’s website are $99.99 and $149.99 respectively (and they are sold out).

·         One estimate is that the cost of an assembled TouchPad is $328.15 inclusive of assembly.  That suggests HP is losing at least $178 per tablet at the current price (without permitting for shipping, retailer mark-ups or other amounts that don’t end up with HP).  With Best Buy alone reported to have taken delivery of 270,000 of these tablets (most of which are now selling at the lowest price, and selling quickly), an estimate of at least 300,000 tablets selling at a loss to HP of $190 each ($57 million) would be extremely conservative.  It is likely that far more than this number have been manufactured.

·         HP’s announcement is likely to reduce sales of its PC hardware.  At least one Australian retailer has already advertised 40% off sales on all HP hardware.

In the longer term:

·         HP has shown indecision.  From purchasing Palm to discontinuing the use of the principal property has been less than 18 months.

·         Who wants products that aren’t supported?  People are currently buying HP’s tablets at fire sale prices for two reasons:  hope that someone will roll out an Android operating system patch; and obtaining a cheap tablet.  Oh, and looking to make a quick profit through on-selling.

·         If I own a computer from HP, I’m likely to feel somewhat nervous now.  Even more so if I’m a business with HP on every desk.  Who’s going to be supporting me into the future?

Failure of vision?

HP has shown failure here on several fronts, and could easily have turned some expensive decisions into (at the very least) positives by doing things slightly differently.

1.       No more webOS.  Well, this has to be the stupidest of HP’s decisions when combined with its decision to purchase the OS less than 18 months ago.  What did it gain from that $1.2b?  A brief dance into a market it’s now decided to wipe its hands of.  What could it have done differently?  Find a buyer.  Announce a phase-out.  Figure its strategy before buying.

2.       Uncertainty on the hardware front.  HP has said “we’re going to do something”.  A lot of commentators have compared the decision to get out of PCs with that made by IBM several years ago, but there are differences.  IBM lined up a buyer (Lenovo) before the announcement.  IBM ensured that all its customers knew exactly what was going on, and how they would be supported.  IBM planned.  HP has given no details to its consumers or to the market, and so uncertainty reigns.  In doing this it has reduced the value of whatever business it wants to sell, as customers inevitably go elsewhere.

3.       HP has failed to recognise the value of its brand.  Effectively, it has just trashed its own brand by failing to clearly support its customers.  How would one of these customers who paid $699 for a new tablet feel about now?  Businesses need to show how they are stable and reliable, and HP has failed in this.

4.       HP is trying to reposition itself, and get rid of the parts of the business that don’t make good margins.  It appears not to understand the concept of “loss leaders”, or to have considered how the announced changes will reduce its visibility.

5.       HP has caused confusion.  On the day after the announcement of its changes, HP announced the release of a 64gb TouchPad on its French website.  The French website also appears at the time I am writing this to have unslashed prices on the 16gb and 32gb models.  So HP isn’t talking to itself internationally?

In all, nerds will be disappointed by HP’s withdrawal from the competitive PC and portable hardware markets.  They’ll be saddened to see webOS disappear as an alternative.  And they’ll plan how to use the cheap TouchPads they’ve bought.

The market has already reflected disappointment at HP’s announcement, with a 20% drop on the day.  If the market feels that HP’s strategy is weak, or that the people making it are ineffective, HP shares are in for more pain.

The consumer loses a safe, name-brand option when buying computer hardware.  Regardless of how HP moves to its “strategic alternative” for its PSG, it has created doubt in the minds of its customers that will lose it market share and kudos in the months to come.

HP, you could have handled this so much better.

Resources used in preparing this:

HP website and press releases - www.hp.com

Wikipedia - http://en.wikipedia.org/wiki/Hewlett-Packard

Wikipedia - http://en.wikipedia.org/wiki/WebOS

Wikipedia - http://en.wikipedia.org/wiki/Palm,_Inc.

Autonomy Corporation website - http://www.autonomy.com/

Note:

All amounts are in US dollars.

Disconnects: people and corporations

Background

There is an increasing gap between people and the corporations that exist to serve them.  This short paper aims to examine the historical and current relationships between people and corporations, identify what problems exist in this relationship and (if possible) identify solutions.  It does not examine small business, which has an entirely different dynamic.

Where sources are directly quoted, they will be identified at the point of quotation.  Other sources will be listed at the end.  This is not an academic paper, and so will happily rely on secondary sources such as Wikipedia.  Finally, the source of much of the information here is years of reading and observation so cannot be clearly cited.  If I have said something that you feel is missing adequate citation please let me know.  Comments are welcome, and may be incorporated in updates if I feel like it.


A (very) brief history

Corporations have been around in one form or another for centuries.  They became fashionable in the 17th century, when the capital costs associated with intercontinental trade were prohibitive.  For example East India Companies, both British and Dutch, needed capital to be able to establish bases of operations, pay for shipping, employ large numbers of people, and buy and sell goods on a large enough basis to defray their expenses.  In order to raise that capital, they sold shares in the company.

In the 400 years since then, business has only become more complicated.  The cost of production and distribution of a large proporation of the products we now rely upon is too great for any individual to bear, and changes in laws during that period have encouraged corporatisation.


Why be a business?

There are now many benefits to incorporation.  These can vary widely between jurisdictions, but I have provided a broad summary of just a  few of those benefits:

• Size matters.  Economies of scale are regularly referred to in excusing business mergers and growth.  Less often referred to, but also important from the perspective of the business, are monopoly control, ability to manipulate markets to suit the business, and the ability to create cartels (whether official, such as OPEC, or unofficial, such as the petrol companies that somehow manage to raise and lower pump prices almost in concert);
• Sharing of risks.  A sole owner is responsible for everything their business does.  If the business is bankrupt, so is the owner.  If a corporation declares bankruptcy, while the owners lose some or all of their investment their losses are generally limited;
• Continuity.  A business owned by an individual does not promise a lot of continuity, and its customers will often be worried by that.  Certainly individuals can bequeath family business to their offspring, but this does not always work.  I've heard apocryphally that the first generation tends to build the business, the second to transform it into something bigger and better, and the third to live on past success.  A manager, however, is hired and fired because of their skills, and can always be replaced;
• Tax breaks.  Yes, businesses pay taxes.  But there are plenty of deductions available to them that are not available to the individual operating a business.  There are also opportunities to negotiate "a better deal" with the local government, if you have the...;
• Power.  The larger a business gets, the more power it gains.  This is natural, as it influences more and more people through employment and supplying their needs/wants.

A bit more about businesses

By their nature, businesses exist because of people.  They exist to provide products and services to consumers (who are, coincidentally, people).  Some businesses don't deal directly with people, but through intermediary businesses.  Eventually, however, their purpose is to serve people.

Businesses employ people.  Enormous numbers of people.  In 2007, according to CNN's Fortune 500, the 50 largest US employers had nearly 12 million employees (with Wal-Mart employing nearly 2 million).

Businesses are owned by people.  Even when a business buys another business, it is only acting on behalf of its ultimate owners, the shareholders.


So what's the problem?

Unfortunately, businesses do not alway operate in the best interests of people, and there's a very simple reason for this:  businesses are required to act in the best interests of their shareholders.

What?  That says they must act in the best interests of people.  No, they must act in the best interests of their shareholders, and this is generally interpreted as "we need to make lots of money".

Fine, so that's good for the shareholders isn't it?  Unfortunately, it generally isn't even good for the shareholders, but we'll get to why shortly.

So, businesses need to make money.  That is seen as their primary aim.  And unfortunately to achieve that they employ a range of good, bad and ugly options:

• Cheap labour.  Yes, businesses need employees.  Someone has to do the "stuff".  Whether it involves testing Tickle-Me-Elmo's tickle, or sewing the brand name onto undies, either a machine or a person will do it.  Generally the machine will cost more up-front but is cheaper to feed.  On occasion, though, businesses notice that there are some people who are incredibly cheap to feed and move production to China/India/Vietnam/the next cheap place to make stuff;
• Expensive management.  There is a disconnect between what an individual shareholder thinks a CEO is worth and what the CEO (and ultimately their employer) thinks.  I have yet to see any useful argument to show how one employee is worthy of receiving up to 500 times what another employee is paid.  But the CEO generally has the power to get the salary and the bonuses;
• Growth at all costs.  The global economy is geared towards growth (and this is a subject for a future blog).  Businesses in turn are expected by shareholders to grow.  This means they continually review what gaps they might fill (or create) in markets, how to reduce spending, and how to do the other guy out of a sale;
• Consumerism.  Now this can't necessarily be blamed entirely on businesses, but they should bear a large share of the blame.  Businesses don't just meet previously unmet demand, they create new demand.  They have to, or they couldn't grow.  This means that in Australia there are more mobile phones than there are people;
• Too much power.  Big businesses employ large numbers of people.  They can, if they choose, move those jobs elsewhere.  They can effectively tell people who to vote for (especially if they are in the business of news).  Businesses can dictate terms to governments, and if a government is anti-big business it will not survive.

In summary, businesses are not fulfilling the role originally envisaged for them of enabling investors to get together and make a whole that is larger than the sum of the parts.


So what to do?

Governments have fiddled around the edges of fixing business for many years.  Unfortunately, they are too scared or too owned by large corporations to do too much.  But much needs to be done.

1. Redefine the purpose of incorporated businesses.  The purpose of "providing a return for shareholders" does not adequately reflect the requirement of businesses to operate as part of a modern society.  Goals should include profitability, sustainability, and community.  That is, if a business fails to meet defined social standards it should pay for that failure
2. Enforce regulation, and get rid of self-regulation.  Self-regulation doesn't work.  Nobody wants to punish themselves.  In the meantime, regulators have grown increasingly close to the industries they are regulating.  Yes, it's more expensive to have independent regulation.  The results are worth the price, though
3. Stop letting businesses write laws.  Copyright periods have been extended to enable businesses to make money for a bit longer.  Is this in the interests of the consumer/person?  Patent laws are patently inadequate - just watch the fight between Apple and all comers over tablet computing
4. Stop corporate funding of politicians.  Surely we can do better than the best politicians money can buy?  At the same time, business needs to be removed from political processes.  Business is an artificial construct, not a stakeholder.

Yes, some of these solutions are drastic.  But corporations are not serving the people well now, and without change this failure will continue.


Other sources:

Wikipedia – Corporations - http://en.wikipedia.org/wiki/Corporations

Wikipedia – Stock - http://en.wikipedia.org/wiki/Stock